Figure 4. This re-primarisation was enhanced by growing trade with China, 5 which became a major trading partner of Latin America in the first decade of the twenty-first century, particularly after the North Atlantic financial crisis. Booming Chinese imports also supported the re-primarization process by weakening manufacturing sectors in several or most countries.
Brazil is positioned somewhere between the two groups, since it already had a much more diversified export structure including some technology-intensive manufactures than other South American countries prior to the liberalisation processes.
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In any case, agricultural exports make up an important share of total exports in some Andean countries particularly Ecuador and Chile, but also others, with the exception of Venezuela and Brazil also has important mineral exports, particularly iron ore. This was, of course, a major break with the classical view of David Ricardo, according to which relative commodity prices tend to rise as economies are forced to exploit less productive resources and land rents are pushed up.
The Prebisch—Singer hypothesis involved two complementary ideas Ocampo, The first was that the lower income and price elasticities of demand for primary goods would tend to depress their relative prices as the world economy expanded or, alternatively, constrain the growth rate of natural resource-intensive economies. The second was that of asymmetries in the labour markets of advanced versus developing countries, which implied that technological progress in manufactures would tend to be reflected in increasing real wages in developed countries, whereas it would tend to depress the prices of commodities in the developing world, given the pool of unskilled labour available in developing countries.
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The Prebisch—Singer hypothesis was the subject of heated debate following its initial formulation and was largely discarded both on empirical and analytical grounds. Interestingly, the original hypothesis was revived by the work of Grilli and Yang at the World Bank, who showed that real commodity prices had actually declined through the twentieth century.
These findings triggered a significant flow of empirical contributions to the revived and continuing debate. Schumpeter associated them with clusters of technological innovation that come, in his view, in waves see, for example, Schumpeter, In empirical terms, the tendency of the price of commodities relative to manufactures to follow long waves was later highlighted by Lewis , but received only limited attention.
In recent times, the dominant factor has been, of course, the rising Chinese demand for commodities, but also the effect of a slowdown of world economic growth since the North Atlantic financial crisis, particularly in developed countries. A first approach studies whether long-term dynamics should be understood as the result of a steady trend or of structural breaks in the price series.
Using this methodology, Ocampo and Parra-Lancourt conclude that the fall in real non-oil commodity prices through the twentieth century that Grilli and Yang had identified was essentially the result of two strong adverse shocks: a sudden one in the early s and a second more gradual one in the s. A second methodology involves the decomposition of price dynamics into a trend, and long- and short-term cycles.
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This is the methodology used by Erten and Ocampo , on which I will focus here. This approach has been the subject of an extensive literature; however, since its focus is on the very short-term dynamics of commodity prices, I shall not analyse it here. As the figure indicates, real non-oil commodity prices deflated by the manufacturing unit value in international trade experienced a downward trend through most of the twentieth century and a slight upward trend in the early twenty-first century Figure 4.
An analysis of these trends by commodity groups shows that the downward trend was longer and stronger for tropical agricultural goods years with an accumulated fall of 67 per cent than for non-tropical agriculture 62 years with a total fall of 47 per cent and metals 93 years and 48 per cent. This downward trend was followed by a long-term rise in metal prices since the mids and by a stagnation of the adverse trend of agricultural prices since around the turn of the century Erten and Ocampo, , Table 1.
The overlap of these super-cycles is related to the fact that they are largely determined by trends in world GDP. The effects of trends in world demand are also reflected in the fact that super-cycles show fairly similar peaks but that the downward trend is stronger in periods where world demand has been weak ss and ss than when it has been stronger second half of the s and s.
Finally, the volatility of the short-term cycles was particularly intense in the interwar years of the twentieth century. Source: Updated exercises from Erten and Ocampo This is also reflected in the fact that the means and peaks during the different super-cycles also show a downward trend.
However, the trends in the late nineteenth and early twentieth centuries, as well as that of the early twenty-first century, indicate that this is not an inevitable outcome. More generally, as Erten and Ocampo argue, the tendency for primary commodity prices to deteriorate relative to manufactured goods is not a persistent effect, but rather an evolving dynamic dependent on global demand trends and the effects of technological innovations, both of which are behind the dynamics of the different super-cycles. The long-term downward trend was shorter and weaker 37 years, from to , with a 33 per cent accumulated reduction and there has been a strong upward trend since the s Figure 4.
However, what is interesting is both the strong coincidence of the last two super-cycles of oil and non-oil commodities — again, with the last one still ongoing—and the stronger intensity of the oil super-cycle Figure 4. And within the super-cycle for non-oil commodities, the most intense was that for tropical agricultural goods in the period 35 per cent vs.
Viewed as a whole, oil prices have been the most unstable, whereas non-tropical agricultural prices have been the most stable. The boom of all commodity prices was interrupted during the worst phase of the North Atlantic financial crisis — the months following the collapse of the investment bank Lehman Brothers in September — but soon resumed. Strong Chinese demand was the essential element of both the long commodity boom and the rapid recovery after the North Atlantic crisis. The peaks for oil and metal prices prior to and after that crisis were quite similar, whereas they were stronger after the boom for the two agricultural commodity groups.
The downward trend has been visible for non-oil commodities since but was a gradual process, 12 whereas that for oil came late and abruptly in mid Sources: Updated series from Ocampo and Parra with the same sources and methodology. The improvement in the terms of trade from to either or was strongest for the oil and mineral exporting economies, which, as indicated above, are the Andean countries Figure 4. These were followed by the two major agricultural exporters, Brazil and Argentina. Other South American countries Paraguay and Uruguay and Mexico were in a fairly neutral position, whereas all the small economies of Central America, and the Dominican Republic, were clear losers, as the rise in oil prices dominated any positive effect they experienced as agricultural exporters.
It can be added that the recent collapse in commodity prices has had exactly the opposite effect on the terms of trade of different countries ECLAC, b, Table A Interestingly, in the case of commodity exporters who are also oil importers, the stronger fall in oil prices has ended up mitigating the fall of other commodity prices Chile or even generating an improvement in the terms of trade Paraguay and Uruguay. These expectations were based on the view that the mix of strong Chinese demand, the gradual exhaustion of new oil and mineral resources, and the effects of climate change were bound to be reflected in a Ricardian era of rising natural resource scarcity and high commodity prices.
Long-term trends since the late twentieth century do give some support to the idea of positive patterns of commodity prices, and certainly show that the Prebisch—Singer hypothesis is not an inevitable trend. However, through the prism of the last few years, the predictions of persistently high commodity prices have turned out to be wrong and, particularly, the strong cyclical pattern has been shown to be an essential characteristic of commodity prices.
Indeed, given the slowdown of global economic growth since the North Atlantic financial crisis, a slowdown that is likely to last, if the pattern of past super-cycles prevails, we may be at the beginning of a long period of weak prices. The short-term dimensions are closely associated with the cyclical patterns of commodity prices, which generate fluctuations of income levels that would tend to be transmitted and multiplied through their effects on aggregate domestic demand.
The procyclical patterns of investment are generally strong, and those of consumption have become more important in recent decades, reflecting the strong volatility of economic growth that has characterised Latin America since the s. In turn, the cyclical patterns of commodity prices are enhanced by those of both external and domestic finance.
In the case of external finance, emerging and developing countries tend to experience a strong procyclical pattern, both in terms of the availability of finance and of risk margins and thus the cost of financing higher costs of financing during downswings. In commodity-exporting countries, these cycles tend to follow those of commodity prices.
The distributive effects go in the same direction: if the appreciation benefits workers and the depreciation hurts them, there will also be procyclical effects, given the higher propensity to spend out of wages. The effects of real exchange rate fluctuations on the current account non-primary exports decreasing and imports rising during commodity booms, and the opposite evolution occurring during crises can be countercyclical.
However, if there is an initial surplus during the boom the situation in the period or an initial deficit during the crisis conditions in the period , the initial effect is also procyclical and the countercyclical effects come with a lag. In turn, the dependence of public sector finance on revenues generated by commodity sectors generates a procyclical pattern of fiscal revenues that may be transmitted to public sector spending. In the classical analyses of commodity dependence, associated with Singer and Prebisch, among others, the basic arguments were that manufacturing both generates stronger linkages and is a stronger mechanism of transmission of technical progress.
She argues that today there are ample technological opportunities associated with biotechnology, nanotechnology and environmentally friendly products — opportunities to exploit the whole value chain of natural resource-intensive sectors, and strong complementarities with Asia although now with lower prices. In contrast, her correct evaluation is that Latin America is too far behind in other technology sectors and is no longer a low-wage region, and so can compete neither in the high-technology sectors associated with information and communication technologies nor in low-skilled manufactures.
This implies that the structural vulnerabilities that are associated with commodity dependence are mixed with macroeconomic vulnerabilities. The cyclical patterns of spending associated with commodity booms generate positive effects, particularly on non-tradable sectors, and of course the opposite impact during crises.
In contrast, the cyclical patterns of exchange rates that commodity prices generate — real appreciation during commodity booms, depreciation during crises—would tend to have negative effects on non-commodity tradable sectors exporting and import-competing manufacturing and some service activities during booms and may increase the volatility in the profitability of investment in those sectors more generally. Firms in non-resource tradable sectors may actually go bankrupt during commodity booms, generating permanent effects on economic structures and productivity losses if productivity is associated with production experience Krugman, There may also be important distributive effects, associated with land concentration in the case of agriculture and high industrial concentration in the cases of hydrocarbons and mining.
However, I would like to concentrate on strictly macroeconomic issues here. A shows the tendency of aggregate private demand to move in a strong procyclical fashion, generating cycles that are stronger than those experienced by GDP — that is to say, stronger expansion during booms, stronger contraction during crises. These cycles were sharper during the long commodity boom of the early twenty-first century, as improvements in the terms of trade enhanced income growth, leading to a stronger expansion in aggregate demand.
Against a background of improving global growth and rising oil prices, the outlook is for a strengthening of the recovery and continued convergence of inflation to the target. Medium-term growth prospects are favorable, helped by export growth and infrastructure investment. The new administration is making efforts to engage with the private sector and tackle corruption , which could benefit the economy in the longer term.
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However, in the short term, the economy remains vulnerable to external shocks, calling for reducing the fiscal deficit and regaining competitiveness through structural reforms. In Peru , growth showed signs of recovery in the second half of In , a broad-based expansion in domestic demand is expected to drive growth up to around 4 percent. Exports should remain robust, but their contribution would be more modest than in the last two years given that new mining projects reached nearly production capacity in On the policy side, the authorities remain focused on implementing countercyclical fiscal and monetary policy and structural reforms.
The planned fiscal impulse in will be key to achieving a growth rebound. In Venezuela , the crisis continues.
This trend is the result of significant micro-level distortions and macroeconomic imbalances compounded by the collapse in oil exports—initially from the sharp fall in oil prices in mid and, more recently, from the collapse in domestic oil production. Upcoming elections in many countries creates economic and policy uncertainties in the next year. Pressures for inward-looking policies in advanced economies—including through a retreat from cross-border integration—and factors such as global geopolitical tensions and extreme weather events could compound these uncertainties.
In addition, financial market conditions could tighten if inflation increases more than expected in the United States, or if global financial vulnerabilities build up due to excessive risk taking during the long period of very low interest rates and low asset price volatility. Looking beyond the near term, the region faces serious medium-term challenges. Subdued potential growth and downside medium-term risks call for further efforts to rebuild buffers and implement structural policies to address growth bottlenecks and improve resilience. To better withstand future shocks, maintaining exchange rate flexibility, and further improving central bank communication and transparency would increase the resilience and effectiveness of monetary policy.
Save my name, email, and website in this browser for the next time I comment. The report suggests that many countries must make fiscal adjustments to avoid higher debt without compromising the significant social gains of recent years, and details both the types and speed of policies that may be adopted. Monetary normalization may be a chronicle foretold, but countries still have the power to influence the outcome for their own economies.chesttrannigti.gq
Central America Consensus Forecast Report | FocusEconomics
This report focuses on the risks Latin American and Caribbean countries face and how they can reduce vulnerabilities and enhance opportunities. Global growth projections have waned since last year and growth may be suppressed below potential for several years to come. Lower global growth will, all things being equal, imply lower growth in Latin America and the Caribbean. At the same time, clear limits to the potential use of monetary and fiscal policy measures pose another constraint. Consequently, countries should consider further structural reform measures to enhance economic prospects and to escape suppressed global growth.
Scenarios are constructed employing a modeling exercise that captures the trade, financial and other linkages between the region and the rest of the world. While vulnerabilities remain and external shocks have been and remain critical, the region enjoys many strengths and has developed a growing arsenal of policy tools. What is the balance of vulnerabilities versus strengths? How can countries address the existing vulnerabilities?
Andrew has a PhD from Oxford, was Chief Economist of the Central Bank of Argentina and has published numerous academic papers in leading journals in several areas including commodity markets, banking and international finance.